Traditional and Khoi-San Leadership Bill: Auditor-General submission

22 August 2017

Chairperson: Mr M Mdakane (ANC)

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Meeting Summary

Auditor-General South Africa (AGSA) had sent a letter in September 2016 to the Committee outlining its comments on the Bill. The briefing did not to speak directly to that letter but would speak to issues that had arisen. One of the major concerns was how traditional councils would be doing financial reporting. There were over 800 established traditional councils. AGSA expected the number to double when Khoi-San traditional councils were established. AGSA considered it a daunting auditing task when one considered that there would be around 1 500 auditees. At present AGSA was already running thin on capacity. The concern that AGSA had was that clauses 19(2)(b) and 20(2)(b) in the Bill expressly stated that AGSA “must” audit traditional councils. AGSA was not given any discretion to decide which traditional councils should be audited. Some traditional councils were so small and had few activities that it was not worthwhile to subject them to an audit. AGSA suggested rather that a provision be included in the Bill along the lines of, “All traditional councils must be audited”. Members were informed that AGSA had since 1994 not received financials from tribal authorities. Everyone had to abide by the GRAP accounting system when being audited. The problem was that some of the 800 traditional authorities were not properly constituted. The GRAP system required that auditing be done in a certain way. 95% of traditional councils could not provide proper GRAP financial reporting statements. Traditional councils also lacked the capacity to meet GRAP system requirements. Doing a full audit of traditional councils would use up most of the budgets of traditional councils. Traditional councils already felt that they were poorly funded.

AGSA had 3 500 employees but only 1 500 were actual auditors. Another problem was that not all traditional councils received money into their bank accounts. No money was passing hands and hence there was no need for financial statements to be in place. Section 4(1) of the Public Audit Act stated that AGSA must audit any institution which received funding. However section 4(3) of the Public Audit Act gave AGSA the discretion to audit. AGSA for example did not audit South African Airways (SAA) and Eskom. SAA and Eskom appointed their own auditors. AGSA however checked on how things were audited and could raise red flags if needed. Given the huge number of traditional councils that were expected, AGSA felt that traditional councils should be audited in terms of section 4(3) of the Public Audit Act. AGSA was not saying that traditional councils should not be audited. However, instead of AGSA doing the audits, small auditing firms could be tasked with this. It had to be remembered that traditional councils came in different sizes.

AGSA said a system change was needed in order for all traditional councils to be properly established and constituted. A mechanism was also needed to ensure that big and small traditional councils had to be able to report financially. There had to be the necessary skills and capacity. AGSA felt that the system of auditing was already covered by the Public Audit Act. It was an opportunity to provide smaller auditing firms with work. AGSA did already outsource work to smaller auditing firms. It additionally provided an opportunity for smaller firms to get acquainted with how the GRAP system and the public sector worked. AGSA pushed for transformation.

AGSA pointed to clause 23(3)(b) of the Bill as the word “may” gave the Premier of a province the discretion to determine financial systems and controls as well as reporting requirements applicable to traditional councils. AGSA was concerned that this provision would create inconsistencies as it may vary from province to province. Other concerns were what financial year would be applicable to traditional councils, the time period within which financial statements had to be submitted for auditing, and the financial reporting framework that should be applied.

Members observed that the oral submission by AGSA had gone beyond what was in AGSA letter to the Committee about its capacity constraints to audit traditional councils. AGSA was asked how it felt the Committee could assist. They said that that AGSA’s recommendation FOR clauses 19(2)(b) and 20(2)(b) wAS good. Members did however suggest that where an audit was done by an outside auditor that a clause was needed providing for AGSA to have the discretion to step in and make a different determination. On clause 23(3)(b) which gave the discretion to the Premier to make a determination, Members suggested that instead the Minister in consultation with National Treasury make the determination to ensure consistency. The Committee agreed that norms and standards had to be determined nationally and the Minister of Finance determined norms and standards.

Some Members agreed with the AGSA suggestion that the audit of traditional councils should be done by small firms given the limited budget of traditional councils. Concerns were raised about the cost to traditional councils for audits outsourced to private firms. A cost analysis was needed. Was it not more cost effective to increase the audit staff of AGSA? Members asked what financial year start date would be applicable to traditional councils. Would they follow the prescripts of the Public Finance Management Act (PFMA)? AGSA was asked what evidence it had that there were 800 structures that had gone through legal processes to form traditional councils. Some Members felt the audit of traditional councils would never take place. Members asked what sanctions were in place if traditional councils did not have an audit. Some Members suggested that a possible sanction could be that the funding for the following year should be withheld if there was non compliance. The Chairperson commented that the problem with traditional leaders and traditional communities was that there was a lack of accountability. Norms and standards were needed.

The Department of Cooperative Governance and Traditional Affairs responded to the AGSA submission and was accommodating but it noted that currently there were 826 traditional councils but it disagreed with AGSA on the figure for Khoi-San communities which was far less than AGSA's estimate.

Meeting report

The Chairperson pointed out that the Committee had the previous day attended public hearings on the Traditional and Khoi-San Leadership Bill at Saldanha Bay in the Western Cape.

Auditor-General South Africa (AGSA) comments on Traditional and Khoi-San Leadership Bill
Mr Walter Bhengu, AGSA Senior Manager: Legal Services, noted that AGSA had already sent a letter dated 5 September 2016 to the Committee outlining its comments on the Bill. Mr Bhengu chose not to speak directly to the letter but would speak to issues that had arisen.

One of the major concerns was how traditional councils would be doing financial reporting. There were over 800 established traditional councils. AGSA expected the number to double when Khoi-San traditional councils were established. AGSA considered it a daunting auditing task when one considered that there would be around 1 500 auditees. At present AGSA was already running thin on capacity. The concern that AGSA had was that clauses 19(2)(b) and 20(2)(b) in the Bill expressly stated that AGSA “must” audit traditional councils. AGSA was not given any discretion to decide which traditional councils should be audited. Some traditional councils were so small and had few activities that it was not worthwhile to subject them to an audit. AGSA suggested rather that a provision be included in the Bill along the lines of, “All traditional councils must be audited”. Members were informed that AGSA had since 1994 not received financials from tribal authorities. Everyone had to abide by the GRAP accounting system when being audited. The problem was that some of the 800 traditional authorities were not properly constituted. The GRAP system required that auditing be done in a certain way. 95% of traditional councils could not provide proper GRAP financial reporting statements. Traditional councils also lacked the capacity to meet GRAP system requirements. Doing a full audit of traditional councils would use up most of the budgets of traditional councils. Traditional councils already felt that they were poorly funded.

AGSA had 3 500 employees but only 1 500 were actual auditors. Another problem was that not all traditional councils received money into their bank accounts. No money was passing hands and hence there was no need for financial statements to be in place. Section 4(1) of the Public Audit Act stated that AGSA must audit any institution which received funding. However section 4(3) of the Public Audit Act gave AGSA the discretion to audit. AGSA for example did not audit South African Airways (SAA) and Eskom. SAA and Eskom appointed their own auditors. AGSA however checked on how things were audited and could raise red flags if needed. Given the huge number of traditional councils that were expected, AGSA felt that traditional councils should be audited in terms of section 4(3) of the Public Audit Act. AGSA was not saying that traditional councils should not be audited. However, instead of AGSA doing the audits, small auditing firms could be tasked with this. It had to be remembered that traditional councils came in different sizes.

AGSA said a system change was needed in order for all traditional councils to be properly established and constituted. A mechanism was also needed to ensure that big and small traditional councils had to be able to report financially. There had to be the necessary skills and capacity. AGSA felt that the system of auditing was already covered by the Public Audit Act. It was an opportunity to provide smaller auditing firms with work. AGSA did already outsource work to smaller auditing firms. It additionally provided an opportunity for smaller firms to get acquainted with how the GRAP system and the public sector worked. AGSA pushed for transformation.

AGSA pointed to clause 23(3)(b) of the Bill as the word “may” gave the Premier of a province the discretion to determine financial systems and controls as well as reporting requirements applicable to traditional councils. AGSA was concerned that this provision would create inconsistencies as it may vary from province to province. Other concerns were what financial year would be applicable to traditional councils, the time period within which financial statements had to be submitted for auditing, and the financial reporting framework that should be applied.

Discussion
Mr E Mthethwa (ANC) observed that the oral submission by Mr Bhengu spoke more to the capacity constraints of AGSA to audit traditional councils. It had gone beyond what was contained in the letter dated 5 September 2016. He suggested that AGSA inform the Committee on how the Committee could assist it.

Mr Bhengu replied that the additional matters which he had spoken were perhaps not contained in the letter. The additional comments would be added to the submission previously sent to the Committee.

Mr K Mileham (DA) felt that AGSA’s recommendations on clauses 19(2)(b) and 20(2)(b) were good. He however suggested a clause be added to state that if the audit was done by an outside auditing firm, AGSA had the discretion to step in and make a different determination if need be. On clause 23(3(b) which spoke about the discretion of the Premier, he suggested that the Minister in consultation with National Treasury should make such determinations. This would ensure that there was consistency. He agreed that traditional councils had small budgets and the suggestion that audits be done by small firms was a good one. What would be the “financial year” of traditional councils? Not much had been said about it. A provision to this effect had to be integrated into the Bill by the Department.

Mr Bhengu was glad that Mr Mileham agreed with AGSA’s suggestions. He also agreed with the suggestion made by Mr Mileham about a provision being included in the Bill that where an outside audit had taken place AGSA had discretion to step in if need be. On clause 23(3(b) which spoke about the discretion of the Premier with the use of the word “may”, Mr Bhengu agreed that placing it in the hands of the Minister and making it mandatory for consultation with the use of the word “must” would help with consistency. He said that if traditional councils were required to fulfil all the requirements of the GRAP system it could cripple them financially. This was surely not the intention. On the start of the financial year, he felt that traditional councils should follow the Public Finance Management Act (PFMA). Departments after all followed the financial year as prescribed by the PFMA.

Mr C Matsepe (DA) asked what evidence there was that 800 structures had gone through legal processes to form traditional councils. He felt that the audit of traditional councils would not take place. He wished there to be concrete evidence on how many traditional councils were being established. The persons in charge of the establishment of traditional councils need to look into it.

Mr Bhengu responded that AGSA estimated the figure to be around 800 traditional councils. There was no definite figure. Hence traditional councils had to be properly established and constituted.

Mr Mileham asked if there were any sanctions in place if traditional councils did not have themselves audited.

Mr Bhengu replied that it was good to have a sanction in place if the need for it should arise. AGSA felt that perhaps a sanction was needed when positive reassurance was not working.

Mr Z Xalisa (EFF) asked if AGSA was saying that traditional councils with huge finances would be audited and those with miniscule budgets would not be audited.

Mr Bhengu replied that he was not saying that smaller traditional councils should not be audited. If public funds were received then financial reporting needed to take place. GRAP requirements could however not apply to smaller traditional councils. Perhaps National Treasury and the Department of Traditional Affairs could come up with a recommendation about this.

The Chairperson thanked AGSA for its input and asked if the Department of Traditional Affairs had any comments.

Dr Rinaldi Bester Chief Director: Policy and Legislation, Department of Cooperative Governance and Traditional Affairs, pointed out that the number of traditional councils was around 826. He noted that there was legislation which spoke to the reconstitution of traditional councils. He disagreed with AGSA. The figure on traditional councils would not double when the Khoi-San came on board. The figure for Khoi-San communities was far less than what AGSA estimated it to be. He referred clauses 19(2)(b) and 20(2)(b) which made it mandatory for AGSA to undertake the audits and explained that National Treasury had asked for this. The Department of Traditional Affairs in its original draft of the Bill did not have this provision. He had no problem amending the clauses. AGSA had spoken about section 4(3) of the Public Audit Act. The issue was whether reference to it in the Bill should be made. He replied that traditional authorities should have their financial year aligned with that of departments. It should be expressly provided for in the Bill and elsewhere. On the one month issue raised by AGSA he stated that it was about timeframes. He asked Mr Bhengu what AGSA proposed. Where audits were done by small firms as AGSA had suggested he asked how AGSA intended to monitor those audits. On the matter of clause 23 which spoke about the discretion of the Premier he explained that the clause had been drafted by the Department of Traditional Affairs and National Treasury. He was willing to amend the section by changing “may” to “must”. However he did not wish to elevate the matter to the level of the Minister. He wished for it to remain with the Premier as the issue was about provincial funds. On the matter of a sanction for traditional councils that did not submit to audits, he asked what type of sanction was being proposed. Could it be a jail term or the payment of a penalty?

Mr Bhengu replied that section 4(3) of the Public Audit Act was automatically applicable. It was not necessary to specifically state it in the Bill. On the one month issue he would speak to his colleagues and get back to the Committee.

Mr Mileham pointed out that municipalities fell under provincial authorities but the Minister of Finance determined norms and standards. It would be unfair if provinces had to do it. Norms and standards had to be determined nationally. On sanctions, he suggested that funding of traditional councils for the following year could be held back if there was non-compliance.

The Chairperson noted that the problem with traditional leaders and traditional communities was that there was a lack of accountability. They did not account. He agreed that national norms and standards were needed. There had to be some way of accounting.

Mr Matsepe felt that traditional leaders would never account. Traditional leaders had influence over who sat on traditional councils.

The Chairperson stated that the Committee would apply its mind about sanctions. There needed to be accountability. However smaller traditional councils should also not be unfairly punished.

Mr Mthethwa was concerned about the cost to traditional councils if audits were to be outsourced. The cost could possibly double compared to AGSA doing the audit. An analysis of costs needed to be done. Perhaps it would be more cost effective to increase audit staff numbers in AGSA.

The Chairperson said that the Parliamentary Legal Adviser, Ms Phumelele Ngema, would consider the proposals made and respond to them the following day. The Committee was expected to deliberate on the Bill clause by clause the following week. The Committee hoped to be done with the Bill by the end of September 2017.